Contact: David Wilson, ext 7407

1 Introduction

1.1 The Panel considered a report by the County Treasurer on the draft Local Government Pension Scheme and Management and Investment of Funds (Amendment) Regulations at its meeting on 23 November 2004.

1.2 This report reminds the Panel of the proposed provisions in the draft regulations, and explains that they have been placed in abeyance by the Government to allow time for further consideration of the changes and the development of best practice advice.

1.3 These are entirely separate regulations from the Local Government Pension Scheme (Amendment) (No 2) Regulations 2004, which the Government now plans to revoke, as reported to the Panel's last meeting on 26 May 2005.

1 Summary of the draft regulations

1.1 There were three main proposals in the draft regulations:

· A rise in the percentage limit on the value of stocks in the portfolio that can be lent by local authority funds to market brokers in return for commission (known as `stocklending') from 25% to 35%.

· The introduction of a requirement for local authority funds to produce a Representation Policy Statement as part of their Statement of Investment Principles (SIP) by 3 October 2005 (see item 6 on this Agenda).

· A new duty for local authority funds to prepare, publish and review a policy statement setting out its communications strategy for the Fund and its promotion to employers and employees.

1.2 At the November meeting, the Panel approved a response to the draft regulations generally welcoming them, although suggesting that, because the areas to be covered by the proposed Communication Policy Statement are already at least partially dealt with in the Fund's SIP, it might be better to include all policies within that document.

1.3 Concern was also expressed at the meeting that stocklending could be used to fuel some of the more disruptive activities of hedge funds, for example the use of borrowed stock to take very short-term speculative decisions that create volatility in traditional equity markets. The Panel asked whether the Fund's current stocklending activities, carried out by Deutsche and Schroders, could be restricted to counterparties giving a commitment not to engage in such activities.

2 Update

2.1 The Government wrote initially in March 2005 stating that these regulations had been placed in abeyance to allow time for further consideration of the changes. A further letter in April 2005 added that consideration of the issues would resume as quickly as possible after the election, with the intention of introducing the necessary amending regulations at the earliest Parliamentary opportunity.

2.2 The County Treasurer has raised the stocklending issue with both Schroders and Deutsche's custodian, State Street. Both have confirmed that they do not vet the activities of stock-borrowers. It would not be possible for the Hampshire Fund to restrict its managers' stocklending activities, unless the Fund withdraws from stocklending altogether. In 2004/05 the Fund earned £123,000 in stocklending commission, equivalent to an extra return to the Fund over the year of 0.006%. This is not a large sum in the context of a Fund valued at virtually £2 billion, but it is worth maximising any income available to the Fund.

Recommendation

1 That the Panel note this report.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

TITLE FILE

None.